Dynamics of Food Price Inflation in Eastern Ethiopia: A Meso-Macro Modeling

Abstract

High inflationary pressure especially in food price has been a top agenda in many developing countries since the last decade as it has been hindering their socioeconomic development. Though Ethiopia is achieving an encouraging economic growth in recent years, the occurrence of galloping inflation mainly since 2005 is retarding its progress and causing high welfare loss. The very step to struggle this problem is documenting the real causes of inflation. So far, there are only few attempts to document the macroeconomic determinants of general inflation in Ethiopia. Specially, empirical works on meso level price dynamics and focus on certain items are scant. This study is, therefore, designed to assess the macro-meso derivers of food price dynamics in Dire Dawa administration and Harari regional state based on qualitative data collected through key informant interview and quantitative monthly data from January, 2001 to September 2012. A result from Vector Error Correction Model (VECM) revealed that, in the long run, money supply, real income and international food and oil price hikes increase domestic food inflation while rise in exchange rate (depreciation or devaluation) was found to decrease inflation. Inflation expectation, smuggling, rise in world oil price and exchange rate are also documented to impact food price inflation of the study area in the short run. Pursuing conservative monetary policy, promoting competitiveness in the market and reducing the cost of making business would help to mitigate the galloping inflation in the study area.

Key words: Price Dynamics, Inflation, Error Correction Model, Smuggling JEL Classification: E31, E37, C32